Survival First, Before Growth - Weekly Blog # 958

 

 

 

Mike Lipper’s Monday Morning Musings

 

Survival First, Before Growth

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

            

 

 

Historic Lessons

The increase in current money is mostly generated by enthusiastic people who are likely to have difficulty surveying basic lessons from the cyclical world. The trick is to know which horse you are riding. Very few investors can seamlessly at once move from one horse to another without being on uncertain ground at times. That is why I recommend a working transition plan that starts with building a buying reserve capable of fluctuating in response to your view of your own situation and the price levels of specific securities.

 

Where Are We Now?

I don’t know, but we seem to be much further along in the development of the enthusiasm fueling rising markets. During the shortened Labor Day week, more stocks were sold than bought during the first three trading days. On Friday, we had a relief rally following a four-week period of small declines. Using equity mutual funds as a useful indicator, at least 85% of mutual fund sector averages fell through Thursday. There were only 15 sector averages that showed gains. Six sectors rose over 5% during the four-week period: Energy Commodities +12.80%, Agricultural Commodities +9.43%, General Commodities +8.67%, Latin American Stocks +7.82%, Precious Metals +7.54%, and Managed Futures Alternatives +5.04%. (As a group they gained from investors nervous about currencies, including the US Dollar.)

Nevertheless, there was still more enthusiasm on the NASDAQ than there was on the NYSE last week, which had 26% of its stocks rising compared to 22% on the Big Board. There was a similar patten for New Highs, with 4.1% on the NASDAQ vs 3.7% on the NYSE. (Clearly, there are a greater number of “AI” related stocks listed on the junior exchange.)

 

Building a Buying Reserve

Every investor likes the securities they hold, but unlike our children, grandchildren, and great grandchildren, we can and should rank the relative attractiveness of what we own. A position which has not recently risen should be questioned, particularly if it is selling below the price paid by a long-term corporate buyer. In terms of the rest, put what you own on a list to gradually reduce by at least 30% and up to 50%. This is particularly true if you expect to gain 10% or less over the next year from today’s price.

 

What To Do with the Reserve Cash?

Today, unless you are a skilled fixed income trader, do not own any bonds longer than 2 years in maturity. Remember, the purpose of the reserve is to give you buying power when the opportunity is right. It is probable the sale of the fixed income buying reserve will lead to a small acceptable loss when you sell to free up cash to buy future big winning opportunities.

 

Until the general market breaks, if any new name added does not rise within the first nine months of ownership it should be sold. You can use the tax loss to reduce the taxes you incur by selling some winnings to add to your reserve. (You can repurchase the name 31 days later if there is a new reason to buy it.)

 

Please let me know if you like this approach so I can learn.  

 

 

 

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Mike Lipper's Blog: Are We in Normal or Historic Times? - Weekly Blog # 957

Mike Lipper's Blog: Is the Volatility of Data in Hiding? - Weekly Blog # 956

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Rhymes + Future Opportunities - Weekly Blog # 942

  

 

Mike Lipper’s Monday Morning Musings

 

Rhymes + Future Opportunities

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

          

           

Truths

From the beginning of human evolution, elders have instructed the young with real and imagined tales of history. For the most part, the speakers were survivors or were protected by survivors. The smarter of the young learned two things, histories tend to repeat, but not exactly. This is where the rhyming came in. Only the very smartest of the young learned that there were tales by losers. To continue being a living survivor the truth in many cases was disguised, as it was more threatening than going into combat. Many passed on their knowledge of events through playwrights, actors, singers, producers/directors and students of the past as made-up dramas.

 

It is too bad that most historical dramas are not taught with a deep understanding of the politics and economics of the day. Matter of fact, that is probably how a skilled professor should teach economics. There is a risk in doing so, as we prefer tales of winning rather than why things happen. Notice that today major TV programs and theatrical productions are produced by organizations dependent on others for capital and licenses.

 

With that as perspective, please look at William Shakespeare’s Merchant of Venice. By the time he produced the play he was a favorite of the British Crown. From an economic point of view the play was opposed to the creation of debt and the timing optionality of repaying debt in unfortunate times. Now, substitute the crown for the debtor in borrowing large sums of money for war making purposes.

 

Does that ring a bell with the current President, who is a personal user of debt and urges businesses to delay recouping wrongly structured tariffs? The bigger problem is that most nations are similarly staying in power by doing somewhat similar things. They are behaving as other members of society do, e.g. businesses, non-profits (particularly universities and hospitals), and retail individuals. In business courses we should teach the proper way to create, manage, and use debt. (I don’t think it is taught at Wharton, where the President attended, or perhaps he didn’t take the class.)

 

The Growing Problem

The following are statements from others related to the problem:

• Barron’s - “Higher bond yields provide competition for stocks.”
• The CBO predicts a federal budget deficit of 5.8% in 2026 and 6.1% for the entire next decade.
• “JP Morgan looks to reduce exposure to $4 Billion in private equity-linked loans.”

 

Longer-Term Opportunities

After the debt problem has been delt with, I look forward to a favorable period for equity investing. The following are brief comments that show some hope for gains.

 

Earlier this year the only mutual funds enjoying substantial gains were precious metals funds and those invested in “AI”. Currently, performance leadership has broadened out to industrials, some financials, and some international stocks traded beyond our borders. Currently, the mutual fund averages in twenty-five sectors out of one hundred and five are doing better than the average S&P 500 index fund.

 

The Financial Times discussed the investment success of Chris Hohn, a very successful British hedge fund manager. In many ways his portfolio is like the portfolio Warren Buffett and Charlie Munger put together, in terms of its concentrated positions. However, Chris Hohn excluded some industries from his portfolio that Berkshire had used in the past, like banks, utilities, media, and insurance. Both he and Berkshire Hathaway (*) like monopolies and duopolies and spend a great deal of time studying the barriers to entry for the companies.

* Stock owned by personal and investment accounts

 

One of the largest industries critical to the health of the world is the healthcare industry, which is selling at its lowest price since 2000. This is a difficult industry for me to directly invest in. Picking the winner requires a good understanding of what is being developed in their own and competing laboratories as well as the rules likely to be issued by various government agencies. The way we participate is by using mutual funds that have appropriately qualified staff.

 

One stock we own for the next bull market is Korn Ferry (*), a leader in employment management. We see it an “ultimate income” play for “AI” layoffs. It has a medium yield.

* Stock owned by personal and investment accounts

 

We are looking for more stocks for the next “bull market”.

                                        

 

 

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Mike Lipper's Blog: Many Trends Within the Same Market - Weekly Blog # 941

Mike Lipper's Blog: What Can Go Wrong - Weekly Blog # 940

Mike Lipper's Blog: This Weekend’s Learning Sources - Weekly Blog # 939

 

 

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We Have a Management Problem - Weekly Blog # 935

 

 

 

Mike Lipper’s Monday Morning Musings 

We Have a Management Problem

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

                         

 

The Founding Fathers Saw it

When unsuccessful in getting George Washington to accept the title of King they decided to name him President, a person who presides over others that are powerful. Notice, they did not choose Executive or Manager. Interesting.

 

Today, the elected leader of the country comes from the commercial world and governs as a Chief Executive. Interesting. The difference between the two labels is that the presiding officer needs to work with other elected officers and not command his or her views become absolute commands.

 

Different Styles = Different Results

The largest owner/leader of a private family company has only the marketplace or regulator that prevents almost complete dictatorial power. This is reinforced by having family members in the named positions. It is worth noting, rarely if ever is one of the senior family members hired away to run a separate public company.  Interesting.

 

One of the realities of managing a successful company is that senior people are often hired away to run competitive companies. GE, JP Morgan Chase*, and Apple* are good examples.

* Indicates shares owned in personal and managed accounts. Interesting

 

The Selling Problem

Emotionally, selling is much more difficult than buying. Afterall, buying is an act of new faith in both a stock and the individual making the decision. At the time of purchase the stock position is the single best bet the investor can make.

 

Selling sometimes involves disappointment in the stock or can be the need for account liquidity. It is like the pain of selling one’s children or losing a personal extremity, but at the time of sale it is the least loved stock in the portfolio. Emotionally it is relatively easy to set up a buying program that purchases a position over time, such as buying a certain number of shares each month for the next year as one gains conviction. However, selling is an entirely different mindset as it is painful to lose a limb or a child, the quicker the better. That may be why more shares have been sold at declining prices on down days for the last six months. Since selling is more emotional it probably makes tactical sense to sell over time. Interesting

 

Reasons to Consider Selling Programs

1. The US has the highest inflation rate of all the advanced economies.
2. Iran has a functioning economy, despite the bombing.
3. There are only 3 mutual fund sector averages that beat the +13.66% 10-year compound average of S&P 500 index funds; Science & Tech +17.82%, Precious Metals Equity +16.77%, and Large-Cap Growth +14.61%. My guess is that it is unlikely these three sectors will outperform the average US diversified fund’s return of +11.16%, nor will they produce double digit gains in the next 10 years.
4. The “Hyperscalers” are commodity players that depend on the long-term prices of fuels for their plants.
5. The Walmart (stock) Recession Signal +10.89% vs the S&P Luxury Price Average -14.8%.
6. Fixed Income strategies in the future won’t follow historical patterns.
7. The President has borrowed the most money and runs the government with biggest deficit. They are urging retail investors to buy debt securities.
8. Ray Dalio believes in the histories of recessions, concluding we are currently in stage five on the way to six.
9. Fitch has noted that the default rate on private debt has risen.
10. The ECRI industrial price index has risen to 135.06, which is a +14.21% increase in the last 12 months.          
11. Note: The job gains for March included jobs for healthcare, which require larger amounts of social assistance and produce less GDP per person.
12. Homer Jenkins Jr. noted in the WSJ that “Trump is a lame duck with low appeal and a surplus of voter distrust.” 
13. We won’t have peace in the middle east until Iran’s sponsorship of death and destruction in the US, UK, Europe, Mideast, Africa, and Asia ends.

 

Interesting. Be Careful                                    

                                        

 

 

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Mike Lipper's Blog: Is History Rhyming Again? - Weekly Blog # 934

Mike Lipper's Blog: Bifocal Analysis: Short & Long-Term - Weekly Blog # 933

Mike Lipper's Blog: This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932

 

 

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Is This The Week That Ends Instability? - Weekly Blog # 924

 

 

 

Mike Lipper’s Monday Morning Musings

 

Is This The Week That Ends Instability?

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 Preface

I believe it was Lenin who said there are decades when nothing happens; and there are weeks when decades happen. Possibly, the four-day trading week beginning this coming Tuesday is such a period. In both the Financial Times and her podcast, Liz Ann Sonders of Charles Schwab* introduced the concept of the period we are going through as an extended period of instability. I am suggesting it is possible the beginning of the end of this period may have begun.

*Shares held in in managed and personal accounts.

 

Fund Data Sets the Table

Whether one invests in mutual funds or not, one should recognize that not only do many people invest in them, but more importantly, many fund managers get their training at fund shops. Thus, one can get an understanding of the institutional mind set by looking at fund data. In the five years ended last Thursday, the London Stock Exchange Group published my old firm’s weekly study of 105 equity related mutual fund peer-groups average performances.

 

The average performance of S&P 500 Index funds was 14.05% compounded for the past five years.  There were only five peer group averages that were better: Precious Metals Equity Funds +21.50%, Energy MLP Funds +20.79%, Commodities Precious Metals Funds +18.75%, Natural Resources Funds +17.30%, and Global Natural Resources Funds +16.05%.  There were just two better performing thematic categories, precious metals and energy. The narrowness of performance leadership proves how difficult it was to pick winners for the past five years. The leadership crown was indeed unstable.

 

Another way to identify the instability in economic data is to examine the tails of the best and worst 2 items shown in Saturday’s WSJ weekly price chart. The best was Silver +11.67% and the second best was the KOPSI +5.55%. The second worst price performance was Financials -2.33%, which was half as bad as Corn -4.71%, the worst performer. The gaps between the top two leaders and laggards suggest concentration is at play.

 

Turning Points Possible Next Week

On Tuesday, probably in the late afternoon, SCOTUS (Supreme Court of the US) is expected to announce its decision on the IEEPA tariff. The President has said he is prepared for an unfavorable ruling and has substitute measures in mind. At best this will be disruptive, and possibly inflationary. The ECRI industrial price index, which is normally slow moving, rose to 120.49% from the prior week’s level of 117.42%.

 

Markets are anticipating problems, either from Tariffs or possibly Iran. Sixty-two percent of the stocks traded on the New York Stock Exchange (NYSE) rose last week, while only fifty-three percent rose on the NASDAQ. The NASDAQ trades more tech stocks and the shares of younger companies. Thus, the junior exchange is likely to react more than the “Big Board” to news events. Retail investors, when not gambling, are more active on the junior market. One possible measure of this is the American Association of Individual Investors (AAII) sample survey, which reported 49.5% bullish for the next six months, up from 42.5% the prior week. What may be more significant is the 28.2% that were bearish. Many professional traders believe “the public” is wrong at turning points.

 

The Davos meeting begins Tuesday, with many political and economic leaders present and chatting. One doesn’t know what will be discussed and how meaningful the meetings will be.

 

Keep us Informed as to any Changes in Your Views.   

 

 

 

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Mike Lipper's Blog: How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923

Mike Lipper's Blog: Data May Be Signaling Change - Weekly Blog # 922

Mike Lipper's Blog: Investment Time Horizon Should Pick How You Measure the Results - Weekly Blog # 921

 

 

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How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923

 

 

 

Mike Lipper’s Monday Morning Musings

 

How Much Longer Can We Avoid

Thinking About the Long-Term?

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

First Week 2026

Using the performance of equity mutual funds, it was a great week with average gains of more than +2%. If repeated for each week of the year it would produce returns of over 100%. Even the value of the US dollar rose a bit during the week. That was the delusional news! What’s even worse, the average commodity fund invested in gold and other precious metals rose +4.02%. Funds owning stocks of gold and other precious metal mining companies gained +5.32% on average through Thursday. The latter can suffer mining risks, labor strikes, and raised taxes. Historically, gold has been a hedge against the value of a currency, particularly the US dollar. There is also a small industrial market for gold in the electronics market, which might be in the region of $1,000 an ounce. How much demand for gold jewelry is really demand for a convenient way to pass on its monetary value? I don’t know. Part of the demand for gold as a use in the crypto world is not known by me. All told, I suspect over half of the value of gold is as a substitute for the US dollar.

 

What Is The Value Of The US dollar?

Something is worth what someone is willing to pay for it. Currently, it appears to be about $0.99 cents, up from $0.96 cents. However, the critical question is its worth in the future. That appears to be what someone is willing to pay for it, delivered today or on a specific date and quantity in the future.

 

According to a paper prepared by the National Bureau of Economic Research. Twenty-five years ago, people believed the US fiscal budget looking forward 10 years would be $5.9 Billion, with all public debt paid off by 2006. The readers of the One Big Beautiful Bill Act now project a 2054 debt to GDP ratio of 199%, incorporating temporary provisions. Net interest payments would rise to 6.3% from 3.2% today. (I don’t know how to impact these numbers with the increase in gambling.  In first 11 months of 2025, total sports gambling in New Jersey was $67 Billion. The rise of non-securities backed gambling, particularly among the young, appears to be on the rise.)

 

Why Should We Care?

Even with the increase in retail securities markets investing, institutional investors set the prices of fixed income securities and many large-cap stocks. Most money invested through 401k and similar retirement accounts are invested in mutual funds or SMAs. Insurance companies, endowments, and other institutional investors may increase their investment in foreign securities, which will impact domestic stock prices. Both domestic and foreign controlled investors may shift some of their investment focus if the dollar becomes weaker.

 

Leaders Increasingly Think Globally

Foreign leaders have increasingly thought globally in determining their strategies. Our main adversaries, China, Russia, and North Korea are strategists, whereas the US tends to view the world as tacticians through domestic glasses and the next election time scale. Luckily, many of our domestic commercial leaders are increasingly thinking strategically.

 

Strategies Going Forward

Going forward, we should recognize that the world is changing at a rapid rate and we need to change with it. Old rules and strategies will change. We must be careful.

 

Please share your thoughts.

 

 

 

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Mike Lipper's Blog: Data May Be Signaling Change - Weekly Blog # 922

Mike Lipper's Blog: Investment Time Horizon Should Pick How You Measure the Results - Weekly Blog # 921

Mike Lipper's Blog: Tis the Season of Joy & Reflection - Weekly Blog # 920

 

 

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Four Lessons Discussed - Weekly Blog # 877

 

 

Mike Lipper’s Monday Morning Musings

 

Four Lessons Discussed

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 Farmers’ Experience Led to the Crash

Is 1930 a preview of 202x? To set the stage, the 1920s were a period of transition and economic expansion. America and most of the industrial world enjoyed meaningful economic progress spurred on by the encouragement of increased debt. Governments, companies, individuals, and farmers used the resources of others to leverage their assets with increasing debt, fulfilling their perceived needs at ever increasing rates. The lessons of the 50-years before WWI were distant memories.

 

Due to WWI mobilization, women entered the workforce in increased numbers. The returning military found farm work too hard and too poorly paid on the farms. Financial communities, which had extensive experience with debt and leverage, found vast new markets for the financial skills of banks and others. Thus, the missing manpower was replaced by expensive machines and chemicals, which led to farmers owning leveraged machines and farms.

 

The age-old problem with leverage is the cost-price spread abruptly narrows. In a world becoming increasingly more global, international trade becomes the fulcrum-point of the fluctuating cost-price spread. To protect those in the middle from price swings, tariffs and other restrictive measures were introduced.

The US consumer desired ever-increasing amounts of food, with much of it imported from lower cost countries. To protect home-grown crops, additional costs and restrictions were placed on imports. Exporting countries fought back by lowering their prices to a point where domestically produced products could not compete effectively. Consequently, domestic farmers got their elected politicians to impose tariffs on imports, like the Smoot-Hawley tariff that President Hoover was reluctant to do. (It was repealed three years later) Other nations reacted by imposing their own tariffs on US exports, which was a contributing cause for WWII. 

 

What will be the impact of the proposed Reciprocal Tariffs being proposed? Despite what is being said, it seems unlikely consumers will avoid some or more of the cost.

 

Learning from Uncle Warren

This weekend Berkshire Hathaway (*) published its results for the 4th quarter and all of 2024, along with a well thought out discussion. The company has four main revenue sources for the heirs of its shareholders. Berkshire has total or partial ownership of over 180 private companies and a smaller but better-known portfolio of quite large publicly traded companies. They also have an increasingly large portfolio of short-term US Treasuries, which increase in value as interest rates rise.

 

The difference between what their insurance companies charge and their eventual payout is called a “float”. In the most current period all earnings asset categories rose, except for the holdings of the publicly owned securities which declined because of sales. The total portfolio rose and is selling very close to its all-time high. Considering the company announced it is being managed for the benefit of today’s shareholder heirs; it is extremely appropriate to occasionally reduce its near-term market risks. (It is worth noting, the remaining two lessons in this blog suggest caution is warranted.)

(*) Owned in Personal and Client accounts

 

The Leading Mutual Funds Suggest US Risk

Each week I look at over 1500 SEC registered mutual funds, as well as many more in the global world. Usually, a number of different drivers describe the leaders of the week.

 

The list below shows the investment objective assigned to the fund:

Precious Metals Equity           21.04%

Commodities Precious Metals      11.86

International Large-Cap Value     8.60

International Mid-Cap Value       8.54

Commodities Base Metals           8.34

International Large-Cap Growth    8.24

Commodities Agriculture           8.15

Warren Buffet, among others, is concerned that the US government may cause the value of the US dollar to drop.

The year-to-date winners are not investing in the US.

 

“Debt Has Always Been the Ruin of Great Powers. Is the U.S. Next?”

 Above is the title of Niall Ferguson’s article in Saturday’s Wall Street Journal where he introduces Ferguson’s Law, which was crafted in 1767. The law states “that any great power that spends more on debt service than on defense risks ceasing to be a great power.” According to the author, debt service includes repayment of debt and defense includes all costs to maintain the military. The US has just passed this milestone, but it would take an extended period to fundamentally break the Ferguson Law.

 

Working Conclusion

Be careful and share your thoughts, particularly if you disagree.

 

 

 

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Mike Lipper's Blog: Recognizing Change as it Happens - Weekly Blog # 876

Mike Lipper's Blog: A Rush to the 1930s - Weekly Blog # 875

Mike Lipper's Blog: More Evidence of New Era - Weekly Blog # 874

 

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Worth vs Price Historically - Weekly Blog # 821

 

Mike Lipper’s Monday Morning Musings

 

Worth vs Price Historically

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

Merchants Needed

Despite what many believe is the oldest profession, growers and herders were the first tribes to survive. As both tribes frequently had more of their own product than necessary, they needed to exchange their excess production with members of the other tribe. Both tribes were skilled in their own production but did not fully understand the other tribe’s costs. Initially, the agreed price was in terms of quantities between the two commodities (x sheep for y bales of cotton).

 

Fairly quickly, solely mathematical terms of exchange (3x for 5y) became insufficient in terms of defining the starting quantity and conditions of transfer. The exchanging parties often did not know or trust the other party. Thus, there was a need for a middleman to determine an agreed price between buyer and seller. The middleman would necessarily be known or recognized by the would-be traders as someone who could be reasonably trusted and was capable of developing accepted terms of trade.

 

With buyers and sellers geographically separate, both in terms of distance and possibly language, the value of a somewhat trusted third party became even more important. Still further elements became essential, a recognized type of money, or later, credit.

 

Over time, the third parties evolved into merchant houses or merchant banks. When dealing across borders and cultures the participants were often happier if the money or credit exchanged was issued by a bank, especially if the bank backed by a government with a wealthy family behind it. At this point these transactions utilized money in the form of coins convertible into known quantities of precious metals.

 

Foreign Exchange

When the western world was ruled by Rome, the value was understood to represent an understood bundle of goods and services. This worked well when the government controlled the coinage. A problem arose when government expenses for war or extravagant expenses rose beyond an acceptable level of taxes paid. A conflict that exists today.

 

Governments addressed the problem by gradually debasing the currency, such as substituting copper and other base metals for precious metals. As governments did this differently, the purchasing power of their money became dissimilar to one another, both in ancient times and today.

 

Those who suffer from a liberal arts education are taught incorrectly that the English Magna Carta was forced by the public on the English king. The real cause resulted from the Barons revolting against the increased tax load on their land. The increased tax load was caused by the expense of the Crusades and the ransom paid for the release of their king who was held hostage in Europe.

 

Today our federal government is changing the rate of taxation and how it is applied to both income and estates. Since foreigners derive earnings from activities and trade in the United States, they react by reducing their exposure to the US dollar, reducing its value. This is currently an issue for an investment committee on which I sit. In looking at our portfolio and foreign expenses at the last meeting, I suggested we begin tracking the changing value of the dollar. It is also something I need to do in looking at portfolio selection.

 

A Historic Portfolio Change

(Please do not take this discussion as a recommendation, as that requires careful analysis of the needs of an account. T. Rowe Price is held in a personal account and some client accounts.)

 

The man, T. Rowe Price, started his investment counsel firm in 1937, a year of a few months of gains in a period of stagflation. Mr. Price was one of a few managers investing in growth stocks at the time. Sometime after the conclusion of WWII he became concerned that the inflationary habit had taken over management of the economy and by 1979 he was disturbed about how the US was doing. He started managing money to graduate from FDR’s New Deal, implementing a philosophy he called New ERA in a new fund concerned about government led inflation. In 1979 George Roach became his assistant, and I believe in 1997 he became the portfolio manager. He later became President of the firm. George kept with Mr. Prices’ concerns, but he allowed the rest of the firm to continue with their growth stock orientation, which produced a very commendable record.

 

Prior to December 2023

The T. Rowe Price New Era Fund was managed with extreme consciousness of inflation. This translated into investing in common stocks of companies expected to rise in the future as inflation rose by investing in assets, not earnings. Most followers of the New Era fund viewed it as a commodities fund because that is what the portfolio looked like.

 

Shinwoo Kim has been the portfolio manager for New Era since 2021 and has been with T. Rowe since 2009. He has proclaimed that commodities have been and are in a long bear market ever since he became portfolio manager, but that changed in December. On the first of December hea as portfolio manager of New Era affected a considerable change in its portfolio, returning it to Mr. Prices’ basic concerns.  

 

Kim feels the US has migrated to a world where inflation and excessive federal government spending is the principal driver of investments. After ten years he has concluded, and convinced the rest of his investment committee, that the commodity cycle is about to change. He expects future investments to benefit from cyclical earnings growth, which will produce better results than ownership in highly valued assets.

As a natural resource fund New Era has not done poorly, compounding at +2.97% compared to the average Natural Resources Fund’s +2.69% over the past ten years. I suspect this outcome was largely the result of its yield, not earnings or Price/Earnings expansion and/or P/E expansion. (The result was not measured against the changing value of the dollar.)

Economists have tagged the price of copper as Dr. Copper. As the price of copper has performed better than most economists over time. The use of copper by the electrical/electronic industries and construction activity gives its use a cyclical growth trend. Other structural changes expected to benefit the portfolio include Uranium and US shale production. The fund believes the long-term outlook for production in Marcellus/Utica as well as Permian is understated. Additional attractive areas for investment include industrial gases and pipelines. (This brings to mind Berkshire Hathaway- a position owned in our personal and managed accounts)

 

 

 

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My Outlook: Nervous Balances - Weekly Blog # 767

 

Mike Lipper’s Monday Morning Musings

My Outlook: Nervous Balances

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

Nervous Dilemma Positioning

My traditional allocation of stocks and bonds being close to a 70/30 split is somewhat misleading. A significant minority is in actively managed stock mutual funds with a financial services or international focus, often Asian. Financial services need a better label, so as to include two stocks of companies that are building their own portfolios that behave similar to variable annuities, Berkshire Hathaway and Apple. (The reason to call them annuities is that they are both primarily managed to produce long-term earnings, rather than current earnings.)

 

Financial services holdings as a group are also expected to fully participate in the growth of the US and International economies. In general, their strength is not in making loans, but in making money with equity. Consequently, one might characterize my equity investments as a combination of growth and value in more classical terms. This is appropriate as most companies have spurts of growth and value.

 

Time Horizons

For both my professional and personal/family accounts I start by designing portfolios built on an understanding (guess) of when and at what frequency the proceeds of the account will be delivered.

 

My particular situation is that I have a younger and healthy wife, with the fourth generation of the family begun. We are also committed to supporting the operational needs of a limited number of non-profits that Ruth and I have been involved with, both as volunteers and donors.

 

Short or Deep Recession?

I tend to look at various down periods through the late reporting of real net income (inflation/foreign exchange adjusted). Where possible, I prefer to use net operating income. Since 1970 the US has suffered 8 major declines of real reported income (-15% to -41%), with a median decline of about -28.5%.

 

The popular view today is that if we have a declared recession, it will be short and small. As someone who learned about odds at the New York racetracks I am nervous with popular views. Their payoffs are too small compared to the pain endured in the prior decline.

 

One theory of economic/market history is that declines are caused by imbalances, which are addressed during the recovery. If that pattern is followed in the next recovery, we may not yet have gone down enough. We need more time before the correction begins.   

 

The current path of major central banks is to follow the Federal Reserve Bank in attacking the supposed major cause of inflation with the only thing they can, short-term interest rates. The best definition of inflation is too many dollars chasing too few goods/services. The last two administrations contributed to these excess dollars, which were officially used to cushion the public’s loss of pre-COVID income with grants. (This was similar to the ancient Romans using bread and circuses to bribe people.) They are still at it!! This will make the Fed’s job more difficult and expensive.

 

Fewer people working should also drop the level of demand. However, despite all the increased regulation and required business spending, there are approximately 1.7 employees wanted for each current worker. This has created a situation where job switchers earn more than those who stay put. (If one really wanted to eliminate excess demand you could simply reduce restrictions on business.)

 

Thus, a shallow recession could be shorter if the federal government wasn’t playing both sides against the middle. This may happen later this year with their hope of a meaningful recovery by Election Day 2024.

 

Assuming this case, financial markets could start up as soon as economic indicators hit a bottom, with smaller declines. Which could happen this year. If this were to happen, our 70% equity stock fund portfolio would produce a nice but not great return. One area to consider for investment are funds that have lost money over the last 10 years through January 12. In general, these funds were victims of a strong US dollar. Included are funds invested in commodities, emerging markets based in local currencies, Latin Americas, and precious metals.

 

Second through Fourth Generations

While a recovery based only on lowering inflation and interest rates will generate returns for my wife and me, it would have little impact on succeeding generations, including various long-lasting charities.

 

The larger and longer-term problems that will reduce returns for succeeding generations will not be addressed by the level of interest rates. Most of these problems are related to people rather than numbers. These problems could be expressed as “Better for customers, workers, and owners”.

 

Below is a brief list of imbalances that should be addressed:

1.  Quality of leadership in each sector and operating unit of society, including levels of governments, segments of health and medical, education, and non-profits.

2.   Middle-class income as a percent of national income returning to levels of the past.

3.   Measured and productive population growth.

4.   Appropriate education for current and future needs.

5.   Governments of the people, by the people, and for the people.

 

Perhaps for the benefit of succeeding generations the appropriate investment strategy should include less exposure to risk until there is a deep enough decline to correct for imbalances.

 

Please tell me what you think?

 

 

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